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Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
International BusinessInternational Business
Rakesh Mohan Joshi Rakesh Mohan Joshi
Professor & Chairperson, IIFT New DelhiProfessor & Chairperson, IIFT New Delhi
1
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
POLITICAL ANDPOLITICAL AND
LEGAL ENVIRONMENTLEGAL ENVIRONMENT
Chapter 8
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
LEARNING OBJECTIVESLEARNING OBJECTIVES
To explain the significance of the political and To explain the significance of the political and
legal environment in international businesslegal environment in international business
To discuss various forms of political systems To discuss various forms of political systems
To explicate different types of legal systems To explicate different types of legal systems
To elaborate principles of international lawTo elaborate principles of international law
To elucidate risks in international businessTo elucidate risks in international business
To explain methods of measuring and To explain methods of measuring and
managing risks managing risks
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
An international firm needs to operate in An international firm needs to operate in
countries having diverse political and legal countries having diverse political and legal
frameworks that, at times, conflict with its home frameworks that, at times, conflict with its home
country. Value judgments made from the country. Value judgments made from the
perspective of the home country considerably perspective of the home country considerably
hinders objective decision-making in the diverse hinders objective decision-making in the diverse
international scenario. Therefore, a thorough international scenario. Therefore, a thorough
conceptual understanding of political and legal conceptual understanding of political and legal
environments affecting international business environments affecting international business
operations is needed. operations is needed.
Significance of understanding International Political & Legal Environment
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
INTERNATIONAL POLITICAL ENVIRONMENTINTERNATIONAL POLITICAL ENVIRONMENT
The political environment of the country of The political environment of the country of
operation becomes increasingly important for an operation becomes increasingly important for an
internationalizing firm as it moves from exports internationalizing firm as it moves from exports
to foreign direct investment (FDI). Cordial to foreign direct investment (FDI). Cordial
political relations between the firm’s home political relations between the firm’s home
country and the host countries have a direct country and the host countries have a direct
favourable impact on its foreign operations. As a favourable impact on its foreign operations. As a
firm expands internationally and begins to firm expands internationally and begins to
operate in multiple countries, the political and operate in multiple countries, the political and
legal issues become increasingly complex. legal issues become increasingly complex.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Political SystemPolitical System
It comprise of various stakeholders, such as It comprise of various stakeholders, such as the government, political parties with the government, political parties with different ideologies, labour unions, religious different ideologies, labour unions, religious organizations, environmental activists, and organizations, environmental activists, and various NGOs. various NGOs.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Political IdeologyPolitical Ideology
A set of ideas or beliefs that people hold A set of ideas or beliefs that people hold
about their political regime and its about their political regime and its
institutions about their position and role in institutions about their position and role in
it. it.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Types of government: economic Types of government: economic systemssystems
Communism:Communism: Form of government based on the Form of government based on the concept of a classless society where all the major factors of concept of a classless society where all the major factors of production are owned by the government and shared by all production are owned by the government and shared by all the people rather than profit-seeking enterprises, for the the people rather than profit-seeking enterprises, for the benefit of the society.benefit of the society.
SocialismSocialism:: A form of government where basic and heavy A form of government where basic and heavy industries are operated by the government so as to ensure industries are operated by the government so as to ensure social welfare objectives wherein small businesses may be social welfare objectives wherein small businesses may be privately owned.privately owned.
CapitalismCapitalism: : An economic system which provides An economic system which provides complete freedom of private ownership of productive complete freedom of private ownership of productive resources and industries.resources and industries.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Types of government: political Types of government: political systemssystems
Democracy: Democracy: Government by the people where Government by the people where citizens are directly involved in decision citizens are directly involved in decision making.making.Totalitarianism:Totalitarianism: Dictatorial form of Dictatorial form of centralized government, usually in the hands of centralized government, usually in the hands of a dictator who regulates every aspect of the a dictator who regulates every aspect of the state. Various forms of totalitarianism include:state. Various forms of totalitarianism include:
• Secular totalitarianismSecular totalitarianism• Fascist totalitarianismFascist totalitarianism• Authoritarian totalitarianismAuthoritarian totalitarianism• Communist totalitarianismCommunist totalitarianism• Theocratic totalitarianismTheocratic totalitarianism
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Types of government: structureTypes of government: structure ParliamentaryParliamentary:: The government consults The government consults
its citizens from time to timeits citizens from time to time and the and the parliament has power to formulate and parliament has power to formulate and execute laws.execute laws.
Commonwealth CountriesCommonwealth Countries: : Countries Countries representing constitutional monarchies representing constitutional monarchies which recognize Queen Elizabeth II as head which recognize Queen Elizabeth II as head of the sate over an independent of the sate over an independent government.government.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
•Monarchies: Countries that have monarchs as the
heads of government. There may be either
constitutional or absolute monarchies.
•Theocracy: The rule of god where the civil leader is
believed to have a direct personal connection with god.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Trade Embargos: Trade Embargos: Prohibiting trade Prohibiting trade
completely with a country so as to completely with a country so as to
economically isolate it and apply political economically isolate it and apply political
pressure on its government.pressure on its government.
Trade Sanctions:Trade Sanctions: Imposing selective Imposing selective
coercive measures to restrict trade from a coercive measures to restrict trade from a
country .country .
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Bureaucracy:Bureaucracy: Form of administration based Form of administration based
on hierarchical structure governed by a set of on hierarchical structure governed by a set of
written rules and established procedures. written rules and established procedures.
The term is often used to describe inefficient The term is often used to describe inefficient
and obstructive administrative process and and obstructive administrative process and
red-tapism.red-tapism.
Terrorism:Terrorism: Systematic use of violence to Systematic use of violence to
create fear in general public with an create fear in general public with an
objective to achieve a political goal or convey objective to achieve a political goal or convey
a political message.a political message.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
INTERNATIONAL LEGAL ENVIRONMENTINTERNATIONAL LEGAL ENVIRONMENT
Firms operating internationally face major Firms operating internationally face major
challenges in conforming to different laws, challenges in conforming to different laws,
regulations, and legal systems in different regulations, and legal systems in different
countries. International mangers need to countries. International mangers need to
understand the types of legal systems followed understand the types of legal systems followed
in the countries of their operations before in the countries of their operations before
entering into legal contracts.entering into legal contracts.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Judicial Independence and Judicial Independence and EfficiencyEfficiency
A fair judicial system also reduces A fair judicial system also reduces
political risks in overseas markets. The political risks in overseas markets. The
level of judicial independence and level of judicial independence and
efficiency differs widely among efficiency differs widely among
countries. countries.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
International Legal SystemsInternational Legal Systems
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Common LawCommon Law: : Law based on traditions, past Law based on traditions, past
practices, and legal precedents set by the courts practices, and legal precedents set by the courts
through interpretation of statutes, legal legislations, through interpretation of statutes, legal legislations,
and past rulings. It depends less on written statutes and past rulings. It depends less on written statutes
and codes. and codes.
Common law originated from England and it is Common law originated from England and it is
followed in most of the former British colonies, such followed in most of the former British colonies, such
as India, United Kingdom, the United States, Canada, as India, United Kingdom, the United States, Canada,
Australia, and New Zealand. Australia, and New Zealand.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Civil LawCivil Law:: LawLaw based on a based on a
comprehensive set of written statutes. It comprehensive set of written statutes. It
is derived from the Roman law and is is derived from the Roman law and is
followed in most of continental Europe, followed in most of continental Europe,
Japan, and Latin America. Japan, and Latin America.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Socialistic Law: Socialistic Law: Socialist law traditionally Socialist law traditionally
advocates ownership of most property by the advocates ownership of most property by the
state or state-owned public enterprises, state or state-owned public enterprises,
prohibiting free entry to foreign firms. prohibiting free entry to foreign firms.
This law is derived from the Marxist socialist This law is derived from the Marxist socialist
system and continues to influence legal system and continues to influence legal
framework in former communist countries, such as framework in former communist countries, such as
the CIS, China, North Korea, Vietnam, and Cuba. the CIS, China, North Korea, Vietnam, and Cuba.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Theocratic Law: Theocratic Law: The legal system based The legal system based
on religious doctrine, precepts, and on religious doctrine, precepts, and
beliefs. For instance, the Hebrew law and beliefs. For instance, the Hebrew law and
the Islamic law are derived from religious the Islamic law are derived from religious
doctrines and their scholarly doctrines and their scholarly
interpretations. interpretations.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Principles of International LawPrinciples of International Law
International law is less coherent International law is less coherent
compared to domestic law since it compared to domestic law since it
embodies a multiplicity of treaties and embodies a multiplicity of treaties and
conventions besides the laws of conventions besides the laws of
individual countries. individual countries.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Principle of SovereigntyPrinciple of Sovereignty
International JurisdictionInternational Jurisdiction
• Nationality PrincipleNationality Principle
• Territoriality PrincipleTerritoriality Principle
• Protective PrincipleProtective Principle
Doctrine of ComityDoctrine of Comity
Act of State DoctrineAct of State Doctrine
Treatment and Right of AliensTreatment and Right of Aliens
Forum for Hearing and Setting DisputesForum for Hearing and Setting Disputes
Principles of International LawPrinciples of International Law
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Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
United Nations Commission on United Nations Commission on International Trade Law (UNCITRAL)International Trade Law (UNCITRAL)
Established in 1966, UNCITRAL aims to Established in 1966, UNCITRAL aims to
reduce and harmonize and unify the laws reduce and harmonize and unify the laws
of international trade. of international trade.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
RISKS IN INTERNATIONAL BUSINESSRISKS IN INTERNATIONAL BUSINESS
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Commercial Risks:Commercial Risks:
Risks such as non-acceptance of Risks such as non-acceptance of
goods, non-payment or insolvency of goods, non-payment or insolvency of
the importer.the importer.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Economic Risks:
Restrictions imposed on business activities on the
grounds of national security, conserving human
and natural resources, scarcity of foreign
exchange, to curb unfair trade practices and to
provide protection to domestic industries.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Political Risks:Political Risks:
Possibility of political decisions, events, Possibility of political decisions, events,
or conditions in an overseas market or or conditions in an overseas market or
country that adversely affect the country that adversely affect the
international business that include international business that include
confiscation, expropriation, confiscation, expropriation,
nationalisation, and domestication.nationalisation, and domestication.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
BERI IndexBERI Index
It provides risk forecasts for about 50 It provides risk forecasts for about 50
countries throughout the world and a countries throughout the world and a
broad assessment of the country’s broad assessment of the country’s
business climate on 15 economic, political, business climate on 15 economic, political,
and financial factors on a scale from zero and financial factors on a scale from zero
to four. to four.
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Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
EIU’s Risk IndicesEIU’s Risk Indices
It monitors operational risks for 150 countries on It monitors operational risks for 150 countries on
a scale of 0 to 100. The overall score includes an a scale of 0 to 100. The overall score includes an
aggregate of ten categories of risks, such as aggregate of ten categories of risks, such as
security, political stability, government security, political stability, government
effectiveness, legal and regulatory, macro-effectiveness, legal and regulatory, macro-
economic, foreign trade and payments, financial, economic, foreign trade and payments, financial,
tax policy, labour markets, and infrastructure. tax policy, labour markets, and infrastructure.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Global Political Risk Index (GPRI)Global Political Risk Index (GPRI)
GPRI is a comparative index to monitor GPRI is a comparative index to monitor
political risks in 24 emerging markets, political risks in 24 emerging markets,
including India, China, Brazil, Russia, and including India, China, Brazil, Russia, and
South Africa. It serves as an ‘early warning’ South Africa. It serves as an ‘early warning’
system to anticipate critical trends and system to anticipate critical trends and
provides a measure for the country’s capacity provides a measure for the country’s capacity
to withstand political, economic, security-to withstand political, economic, security-
related, and social shocks. related, and social shocks.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Failed States IndexFailed States Index
The Failed States Index is a useful tool to carry out The Failed States Index is a useful tool to carry out
the cross-country comparison of the world’s the cross-country comparison of the world’s
weakest states. It uses 12 social, economic, weakest states. It uses 12 social, economic,
political, and military indicators and ranks on a political, and military indicators and ranks on a
scale of 0–120 to assess about 177 states in order scale of 0–120 to assess about 177 states in order
of their vulnerability to violent internal conflict and of their vulnerability to violent internal conflict and
societal deterioration. societal deterioration.
Copyright @ Oxford University Press Copyright @ Oxford University Press International Business R. M. JoshiInternational Business R. M. Joshi
Chapter 8: Political and Legal Chapter 8: Political and Legal EnvironmentEnvironment
Managing Risks in International Managing Risks in International BusinessBusiness
Strategic Management of Political RisksStrategic Management of Political Risks• Employing localsEmploying locals• Sharing ownershipSharing ownership• Increasing perceived economic benefits to the Increasing perceived economic benefits to the
host country host country • Follow political neutralityFollow political neutrality• Assuring social responsibilityAssuring social responsibility• Adapting to local environmentAdapting to local environment
Insurance and GuaranteesInsurance and Guarantees• Export Credit Guarantee CorporationExport Credit Guarantee Corporation• MIGA’s guarantees against non-commercial MIGA’s guarantees against non-commercial
(political) risks(political) risks